The BarkerLetter

The following is the popular explanation for rising oil prices and a falling dollar:

… the dollar became the easiest currency to spend in the global market after World War II, when America’s runaway wartime production capacity supplied Europe and Japan. However, oversupply of dollars in the ’50s led the Central Bankers to redeem them for gold under the terms of the 1944 Bretton Woods treaty. When gold reserves in the U.S. declined, President Nixon abandoned the gold standard.

It was thought the dollar’s influence would decline as traders relied more on emerging European and Asian currencies. Instead, it grew because OPEC quadrupled the price of oil and accepted U.S. dollars in payment. Demand for dollars soared.

From then on, the dollar was effectively backed by oil instead of gold. Because dollars can buy oil, countries that need to import it - which is just about everybody - will accept dollars for their exports. So America can export dollars, which cost nothing to produce, and receive real goods and services in return. That also ensures a continuous inflow of foreign investment to balance the trade deficit.

In the late 1970s, falling oil prices reduced the demand for dollars so an oil-price shock was manufactured, which raised demand again.

However, there is a bigger threat to dollar hegemony now. The Euro Zone has a bigger share of world trade than the USA, and it imports more oil. It offers higher interest rates without a huge foreign debt or trade deficit. OPEC members have began converting reserves to Euros, which has fueled demand and created a handsome increase in the value of their euro reserves.

The first OPEC member to show serious disloyalty to the dollar was Iran, which converted most of its currency reserves to euros during 2002. The second offender was Venezuela, which has proposed a barter system to trade oil for goods without the use of currency at all. The third and most blatant offender was Iraq, which converted its $10 billion “oil for food” reserve fund.

America subsequently occupied Iraq, and immediately stepped up its rhetoric against neighboring Iran, and also Syria, which coincidentally would also like to sell oil for euros because most of its imports are purchased with them …

That’s the popular dollar/oil/war conspiracy theory, and like most theories there is some truth to it. However, there are extenuating circumstances: For one, demand for oil has grown while the infrastructure for refining and delivering it has aged. This creates additional stresses which affect supply/demand, and hence pricing. Oil has also attracted speculators bent on driving the price even further.

I suppose most people think eventually the dollar will strengthen and oil prices will come down. I don’t see that happening unless the Eurozone’s influence diminishes, which is unlikely. The former Soviet Bloc nations will probably end up joining it, or would like to, along with Eurasian countries like Turkey. Imagine all of them trading in Euros!

Also, without petrodollars the only thing that keeps foreign investment humming along is a competitively priced currency. A cheap dollar is about the only thing America has going for it at the moment, so why would they want a stronger dollar?

Many experts believe America needs to reduce its dependance on oil, export more goods and services, service its foreign debt, and accumulate reserves of Euros. A cheaper dollar may be the first step towards that goal. Sure, it’s more expensive for New Yorkers to visit Paris. So let them stay a home!

Personally I like the Ameridollar idea, comprising the U.S., Canada and Mexico.

Be careful out there.
Kb